Corporate Finance – Core Elements & Significance

by Samiksha S. Author

The topic of Finance is a colossal one with many subsets. In fact, it is so broad that many experienced professionals in this field fail to master it. However, they all agree on one aspect of it, i.e., its core element is the art of maximizing profits. But we are not here to discuss the subject of Finance; that's for another time. Instead, we are here to discuss a topic that is a subset of Finance called Corporate Finance, which is considered one of the most crucial aspects of any business. Its essentiality is such that it's considered by many to be the backbone of a country's economy, as all companies depend on it. So, strap on, and let us from the Indian School of Business & Finance, a renowned B.Sc. Accounting and Finance institute in Delhi, walk you through this wonderful subject. Let's move on!

What is Corporate Finance?

Corporate Finance is basically about managing a company's financial resources, including the capital, investments, and debts. It is crucial because it deals with allocating corporate resources to maximize profitability. There are two main types of corporate finance, namely Operational and Financial. Operational financing manages the company's day-to-day costs, such as staff salaries and rent. Financial financing is the process of raising capital through equity, debt, etc. Operations fail without sufficient financial resources, so companies must invest in operational financing to survive. Companies use financial financing to grow and change their products, reach new markets, and acquire other companies.

The Foundations of Corporate Finance

It would be best if you note some basic principles of Corporate Finance to understand it better. So, here we go:

Sources of Funds: Sources of Funds refer to where a company gets its money from to make investments or repay debts. There are three different categories for these sources. These are Equity, Debt, and Hybrid. Debt is borrowed money that companies must repay with interest. It is usually cheaper than equity because it does not require an ownership stake. Equity is when a company issues shares (stock) which gives investors an ownership stake in the company. If a company succeeds, shares will rise in value and vice versa. Hybrid is a category that is a mix of debt and equity.

Uses of Funds: This refers to how the company uses its money for investments, equipment, operations, and other purposes.

Cost of Capital: Cost of Capital is the costs associated with starting a company, including legal fees, accounting fees, capital costs, and start-up costs.

Capital Budgeting: The capital budgeting process helps to decide which investments can be profitable. When structuring a budget, financial analysts often look for alternative investments. They examine the potential short-term and long-term benefits of organizational goals to assess risk and reward. These are essential aspects when it comes to deciding which investment is advantageous.

Capital Structure: The capital structure entails the different forms of financing used by the business entity. For example, the capital structure might include equity, retained earnings, and debts. Thus, ideally, investors prefer debt and equity to be moderately balanced. As a result, the best financial decision is one that provides an optimum mix of various types of funding and enhances a company's value.

Working Capital: Working Capital is the money needed to run a company's day-to-day operations. Good money management helps ensure the company has enough cash flow to align with its policies. It ensures that the organization doesn't risk running out of any critical type of capital, such as cash.

Dividend Distribution: Public companies must report earnings to their shareholders. Due to this, shareholders often wonder what the best ratio of profit distribution is. If they reinvest their surplus as retained earnings, a company must have faith that the money will generate business growth. Concurrently, they must also keep in mind that a certain amount of dividend distribution is also essential for the company to serve its shareholders.

A Further Look into Corporate Finance

It has already been established that the common goal for all businesses is to generate profits and cash flow by increasing revenues and decreasing costs. Increasing revenues means selling more products or services while reducing costs means cutting back on expenses by using more efficient methods instead of spending funds on unnecessary accountments and activities. So, how would you achieve this?

Well, it is a widely accepted fact in the commercial sector that the first step in attaining increased revenues is to come up with and execute a business plan. A few components of this plan include business strategies and marketing and sales techniques. These plans should also have ideas on how you can execute these strategies and at what cost. You should also determine and document the Return on Investment (ROI) of each of these ideas. However, whatever your plan may be, your eventual goal should be to execute it successfully, thus achieving the best possible results.

What is a Business Plan and How to Integrate Corporate Finance with it?

Now that we have a brief conception of a business plan, let's delve into it a bit deeper and find out how we can integrate Corporate Finance with it. First, let's find out how you can create a business plan.

So, a business plan is a document that outlines the goals and objectives of an enterprise and the strategies for achieving them. It is a formal statement of how businesses (potential or otherwise) intend to carry on with their objectives. Here, we, at the Indian School of Business & Finance, a renowned B.Sc. Accounting and Finance institute in Delhi, have brought for you a list of steps you must follow for writing a comprehensive business plan:

Define the purpose of your company.
Analyze what your company has to offer and what your competition is doing.
Determine what resources are needed to make your company successful.
Identify potential risks and develop strategies for mitigating them.
Set financial goals and determine how you will measure success.
Outline the communication strategies you will use.
Create your marketing plan.
Generate financial statements for each year in your business plan.
Get management and investors to help with writing the business plan.
Prepare a budget for each year in your plan.
Present your business plan to investors and other stakeholders.
Make changes based on feedback and implement them in the next version or immediately (if required).
Track progress towards goals and make adjustments along the way.
Review your company's progress at least once every six months after your first year has passed.

While knowing the steps to a business plan is simple enough, integrating Corporate Finance with it is tricky. Integrating Corporate Finance with a Business Plan is a strategic move that can help your business grow. So here, we, at the Indian School of Business & Finance, one of the best B.Sc. Accounting and Finance institutes in Delhi, will provide you with some crucial insights and tips on how to do this:

Gather information from the company's Finance, Accounts, Marketing, and HR departments about the budgeting process and how it impacts your business plan.
Determine the areas of Finance you would like to learn more about.
Create a list of key financial indicators, such as cash flow, income statements, budget forecasts, and balance sheets.
Check whether the business plan matches the company's long-term and short-term financial objectives and then take steps to integrate them.
Implement HR policies that allow inter-department transfer of talents as an integration step that would help use knowledge of one department by the other.

How to Make Use of Corporate Finance to Make Profits?

Most businesses know the essentiality of Corporate Finance, as it allows them to protect themselves from potential risks and take advantage of scenarios to make profits. The profit-making process can be done in a variety of ways, such as:

The most common way to generate profits is by increasing sales and reducing expenditure.
Another way to generate profits is by investing in new projects with a high return on investment that is not too risky.
One final way to generate profits is by taking advantage of opportunities such as mergers, acquisitions, divestitures, etc., which can provide an instant boost in profitability.

How the Corporate Finance Department Deals with Taxation in a Company?

A significant responsibility of the Corporate Finance department is to implement taxation policies in a company, including understanding what taxes need to be paid, through which legal entities, and how they should be recorded on tax returns. To achieve this, they need to adhere to the following two:

Tax Compliance: This is done by filing required tax forms and paying them on time. It also includes calculating taxes owed or refundable ones under the current law and making appropriate adjustments to the company's accounting records where necessary.

Tax Planning: This is done by making adjustments in the company's accounting records to reduce taxes owed or increase taxes refundable under current law.

Data Analytics Plays a Crucial Role in Corporate Finance

The use cases for data analytics in today's corporate landscape are endless. It has been applied to fields such as Marketing, Human Resources, Finance, etc., and Corporate Finance is no different. It is indispensable because it extracts insights from large data sets to make predictions and identify business trends to make better decisions. Understanding the future is gained by analyzing past and present events to predict the future. Data Analytics has made today's businesses profitable compared to the previous eras as it assists them in growing more rapidly.

Key Differences Between Corporate Finance and Project Finance

Corporate Finance and Project Finance are two important financing concepts that help fulfill a business entity's funding requirement. Both of these financing models use a mix of debt and equity. Nonetheless, there are a few subtle differences between the two. The main ones are:

Corporate Finance is mainly applicable during a company's start-up and significant expansion. Project Finance, on the other hand, is appropriate for funding new ventures of established companies.

While for Corporate Finance, credit evaluation relies on the balance sheet, cash flow, and financial strength of the business as a whole, credit evaluation in Project Finance is based on the feasibility report, asset value, and cash-generating ability of a project.

How Does Corporate Finance Help in the Growth of a Country's Economy?

We all know that Corporate Finance is a process that involves the raising of funds for an organization by issuing securities and/or through borrowing. It also consists of managing these funds, including the cash and capital structure of providing a return on investment. But does it help in the growth of a country's economy? Absolutely!

Firstly, it provides funding for organizations which helps them grow and expand. Secondly, it provides jobs for people who work in this industry. And lastly, it generates revenue for governments through taxes and other means.

Corporate Finance Evolving in Today's Fintech Scenario

The digital era has dramatically affected traditional methods of Corporate Finance. It is due to Fintech solutions that have taken hold over this sector. The conventional approach was a process that involved manual work, calculations, and paperwork. It had to be completed by a team of accountants and auditors who had to analyze the company's financial statements and then come up with a recommendation or decision. In contrast, Fintech has changed the way companies do their finances entirely today. It has simplified the process of recording all transactions in a company, automating it with software that makes it easy for people to track their finances without any hassle. It makes it easier for companies and helps them save money on accountants and auditors who aren't required as frequently.

Bright Career Prospects in the Niche of Corporate Finance

If you are concerned about the career prospects in the domain of Corporate Finance, then we, at the Indian School of Business & Finance, one of the leading B.Sc. Accounting and Finance institutes in Delhi, would like to assure you that there lies a promising future in corporate finance as more and more companies nowadays are treating this department with higher prominence. It is highlighted by the fact that Corporate Finance professionals remain involved in a wide range of tasks, right from analyzing financial statements to managing the cash flow of a company. They also often act as advisors for senior management and assist with mergers and acquisitions.

Thus, as a skilled corporate finance professional, you can expect to be at the forefront of many changes in the business world over the next few years. However, to thrive and succeed in this profession, it is important that you hold the appropriate education that reflects upon your knowledge and skills about the subject. This is where we, at the Indian School of Business & Finance, a well-known B.Sc. Accounting and Finance institute in Delhi, can help you out by providing you with hands-on industry knowledge and the most demanded skills to perform well as per the industry requisites. With the right education and guidance by your side, all you need to do is take a leap of faith and enter this industry. You will not only have a successful career but also become a futurist, perceptive, and financially wise in life.